livingston - hazard in the courtroom

7/31/2019 Livingston - Hazard in the Courtroom

1/43

1

HAZARD IN THE COURTROOM: MORAL HAZARDS ABILITY TO EXPLAIN AN

INSUREDS BEHAVIOR AND WHAT IT MEANS FORFEDERAL RULES OF

EVIDENCE RULE 411

Jared S. Livingston1a

TABLE OF CONTENTS

I. Introduction ........................................................................................................2II. The History and Policy of Rule 411 ..................................................................4III. Moral Hazard: More Than a Mere Guess ..........................................................9

a. Moral Hazard: What is It? ............................................................................9b. Empirical Evidence of Moral Hazard ........................................................12c. Why Moral Hazard Has Not Been Considered ..........................................14

IV. The Relevance of Moral Hazard ......................................................................16a. Moral Hazard Passes Relevances Low Hurdle .........................................16b. Applying Moral Hazard .............................................................................18c. Why Moral Hazard Produces Loss ............................................................20d. The Kinds of Losses Created and the Liability of Those Losses ...............21e. Incentives as Relevant Evidence in Other Situations ................................24

V. Considering the Probative Value of the Moral Hazard Inference ....................27a. Irresponsibility is a Market-Specific Criticism ..........................................30b. The Mystery of Uninsured Motorists .........................................................31c. Need for Further Investigation ...................................................................34

VI. Reconsidering the Prejudicial Effect of Evidence of Insurance ......................36a. Imagined and Exaggerated Prejudice.........................................................37b. Even if There Was Prejudice, It is Curable................................................39

VII. Conclusion .......................................................................................................43

1a J.D. Case Western Reserve University School of Law, 2011. Mr. Livingston is now an associate with the LawOffices of Stuart Berger, PLLC in Houston, Texas.


2/43

2

ABSTRACT

This note explores whether moral hazarda behavioral phenomenon that explains an insureds

behaviormay justify another look at the blanket exclusion of Federal Rules of Evidence Rule

411. Not only does moral hazard implicate the relevance of evidence of insurance in a

negligence action, but it may also reveal that the evidence is not as prejudicial as many scholarsand courts had originally supposed. As a result, Rule 411 could be over-exclusive in its

application, excluding not only a wholly irrelevant part of insurance evidence--the wealth or

ability-to-pay implicationbut also thepart of insurance evidence that implies an insureds

possible subjection to moral hazard. This note discusses how the moral hazard part of insurance

evidence is relevant, and how this evidence yields sufficient probative value to overcome any

potential prejudice.

I.

INTRODUCTION

A cars brakes fail, by no fault of the driver, sending the car and its driver careening

down a hill, at the bottom of which stands a house and an adjacent pond. Impact is imminent,

and the driver, whether heading for the pond or the house, will likely suffer an equal amount of

damage to her car regardless of the direction she steers. Seconds away from impact, the driver

knows, if only in the deep recesses of her mind, that her vehicle is covered by liability insurance.

With an insurance policy that covers liability for property damage, but not for damage that water

causes the car, the driver makes an almost instinctual decision and veers towards the house

away from the pondcrashing through it, and hitting the homeowner who happens to be inside.

The homeowner sues the driver for battery, for which cause of action the homeowner-plaintiff

must demonstrate the drivers intention of trucking through the home. To do so, the plaintiff

seeks to introduce evidence ofthe defendant drivers insurance policy. Maintaining that the

automobile manufacturer was to blame and that there was no intention to aim for the house, the

defendant objects to the introduction of evidence on the grounds that it is inadmissible.1

1 FED.R.EVID. 411. According to Federal Rules of Evidence 411, evidence of insurance is inadmissible on the issueof negligence or wrongdoing.


3/43

3

Aside from being a daunting torts exam question, this glance into the drivers behavioris

an illustration of what economists call moral hazard: a phenomenon positing that people change

their behavior when they do not bear the full costs of their actions.2 Here, because the drivers

policy insures against property and personal injury liability, the driver would not have to pay the

full compensatory amount of expenses in the case of an accident. Because the driver thus does

not bear the full costs of such a decision, the driver may even subconsciously adjust her behavior

so that she prefers behavior that happens to make personal injury more likely and uncovered

damages less likely.

Although this hypothetical is just thathypotheticaland is unlikely to occur, it

illustrates how under current evidentiary rules, what is relevant to an economist may not be

relevant in the courtroom. In other words, moral hazard as an explanation for behavior of

insured individuals would unsuccessfully penetrate the suppressive wall that the Federal Rules of

Evidence have erected around evidence of insurance on the issue of negligence or wrongdoing.3

This is because Rule 411 excludes evidence of insurance from the standard probativeness-

prejudice balancing prescribed by the federal rules,4 and any judge would likely be obliged to

exclude the evidence of the drivers insurance policy, regardless of its explanatory power.5

This note raises the point that considering evidence of insurance within a moral hazard

framework may justify another look at the blanket exclusion of Rule 411. Not only does moral

hazard implicate the relevance of evidence of insurance in a negligence actionand may do so

2 DONALD E.CAMPBELL,INCENTIVES: MOTIVATION AND THE ECONOMICS OF INFORMATION 100 (CambridgeUniversity Press 1995).3 FED.R.EVID. 411.4 FED.R.EVID. 403.5 FED.R.EVID. 411 leaves no discretion to courts to decide the admissibility of evidence of insurance on the issue ofnegligence or wrongdoing: evidence . . . is not admissible. . .


4/43

4

even in situations aside from far-fetched hypotheticals6but it may also reveal that the evidence

is not as prejudicial as many scholars and courts had originally supposed. As a result, Rule 411

could be over-exclusive in its application, excluding not only a wholly irrelevant part of

insurance evidencethe wealth or ability-to-pay implicationbut also part of insurance

evidence that implies an insureds possible subjection to moral hazard. This note discusses how

the moral hazard part of insurance evidence is relevant, and how this evidence yields sufficient

probative value to overcome any potential prejudice. Section II of this note explores this history

and policy behind Rule 411. Section III lays the foundation for considering moral hazard,

including its history, application and empirical evidence of moral hazard. Section IV contains

the main contention of this note, explaining how moral hazard considerations can undermine the

policies upon which Rule 411 is based. Section V considers the probative value of a moral

hazard inference, diverting attention to a possibly competing inference that comes from what a

factfinder might infer about the character of an insured or uninsured individual. With the

probative value of the moral hazard inference observed, Section VI turns to a reexamination of

any prejudicial effect that might result from the introduction of evidence of insurance, before this

note concludes with Section VII.

II. THE HISTORY AND POLICY OF RULE 411Included in the preliminary draft of the Federal Rules of Evidence proposed in 1969,7

Rule 411 codified the common law8 exclusion of evidence of the existence or non-existence of

liability insurance when the proponent offers such evidence to show that a person was negligent

6 While driving is an insured activity that may be easiest to imagine, this note also explores how evidence ofinsurance could be relevant for defendants with other types of insurance, such as health insurance, or for defendantswith an absence of insurance.7 Preliminary Draft of Proposed Rules of Evidence for the United States District Courts and Magistrates, 46 F.R.D.161, 242 at Rule 4-11 (1969).8 Alan Calnan, The Insurance Exclusionary Rule Revisited: Are Reports of its Demise Exaggerated?, 52 Ohio St.L.J. 1177, 1177 (1991); see also e.g.,Barsema v. Susong, 156 Ariz. 309, 312-13, 751 P.2d 969, 972-73 (Ariz. 1988)(reciting a history of state cases that contributed to the development of Rule 411).


5/43

5

or that she otherwise did some wrong. And while the rule as presently codified calls for strict

exclusion of evidence of insurance on negligence issues, the precedent began with even stricter

restraints, where even the mere mention of the word insurance9a kind ofbete noirewas

something to be avoided by witnesses and the court at the peril of withdrawal of a juror or, later,

as a ground for a new trial.10 Eventually, courts began to grind down the rules exclusionary

teeth as certain exceptions to the blanket exclusionary rule developed.11 The exclusions may

have chipped away at the overarching exclusionary rule of old, but yet unmarred is courts

rejection of evidence of liability insurance offered on the issue of fault, as proponents maintain

that the rule still serves some benevolent purpose.

12

The insistence with which courts have applied this rule, however, has not been without

condemnation, as critics have piled on an avalanche of authoritative criticism13 that questions

the need for maintaining a rule based on an archaic legal principle.14 A minority of courts,

moreover, have to some degree echoed the critics. These courts, availing themselves a great

deal of discretion15 with respect to the exclusionary rule, have refused to exclude evidence of

9See e.g.Coble v. Phillips Petroleum Co., 30 F.Supp. 39, 40 (N.D. Tex. 1939) (where the court ordered a new trialafter the mere mention that the defendant carried insurance was imparted to the jury)10Corbett v. Borandi, 375 F.2d 265, 270 (3d Cir. 1967).11Courts began to back off the strict prohibition of the word insurance as they realized the word would sometimesvoluntarily, unexpectedly or incidentally be introduced. See e.g.,Heuss v. Rockwell Standard Corp., 495 F.2d 1207(6th Cir. 1974). Eventually, the more general exceptions codified in Rule 411 slowly developed. See e.g. McCoy v.Universal Carloading & Distributing Co., 82 F.2d 342 (6th Cir. 1936) (holding that evidence that a company carriedliability insurance was admissible to demonstrate agency); Complete Auto Transit, Inc. v. Wayne Broyles

Engineering Corp., 351 F.2d 478 (5th

Cir. 1965) (allowing plaintiffs counsel to illicit testimony regarding the biasof the witness);Ingalls Shipbuilding Corp. v. Trehern, 155 F.2d 202 (5 th Cir. 1946) (rejecting a courts responsibilityto declare a mistrial after insurance had been mentioned and instead permitted the introduction of insurance to showwitness bias).12 Calnan, supra note 8, at 1178.13 M.C. Slough,Relevancy Unraveled, 5 U. Kan. L. Rev. 675, 711 (1957).14Id. at 713.15Mac Tyres, Inc. v. Vigil, 92 N.M. 446, 448, 589 P.2d 1037, 1039 (N.M. 1979) (where the court recognizes that thequestion of insurance can also be proper and dignified before a jury, and therefore applies Rule 403 to determinewhether evidence of insurance was proper before the jury).


6/43

6

insurance because of reasons ranging from belief that the rule rests on fictitious16 beliefs about

the effects of such evidence, to a simple reliance on Rule 403 to balance the evidences effects.17

Courts and legislature rely, however, on two fundamental reasons for the persistent

exclusion of evidence of insurance. Opponents of insurance as evidence contend that evidence

of the existence or non-existence of liability insurance has no business in the courtroom18 as it

has no relevancy19 or even any connection whatsoever20 to the issue of liability. The claim

continues: an inference of fault drawn from the presence of insurance coverageand, similarly,

an inference of non-fault from the lack of coverageis tenuous21 at best with only

questionable probative value.

22

By insisting that the relevance of insurance could only be

derived from an irrational reveling in self-destruction23 and from courting careless24 conduct,

critics may be overlooking the possibility of a more subtle influence on insured individuals.

The second underlying rationale for the exclusionary rule is as follows: the probative

value from such a flimsy25 proposalthat an insured individual would immediately abandon

all care upon obtaining insuranceis allegedly much more than outweighed by the probability

that the real issues will be obscured.26 The belief is that knowledge of [insurances] existence

16Grammer v. Kohlhaas Tank and Equipment Co., 93 N.M. 685, 691, 604 P.2d 823, 829 (N.M. App. 1979) citingOlguin v. Thygesen, 47 N.M. 377, 143 P.2d 585 (N.M. 1943).17Mac Tyres, 92 N.M. at 448, 589 P.2d at 1039.18 These opponents would contend that it has no business in the courtroom because of its irrelevance, as evidencewhich is not relevant is not admissible. FED.R.EVID. 402.19Corbett,375 F.2d at 268.20Ingalls Shipbuilding, 155 F.2d at 204.21

FED.R.EVID. 411 advisory committee notes.22Charter v. Chleborad, 551 F.2d 246, 248 (8th Cir. 1977), cert. denied, 434 U.S. 856 (1977).23 Slough, supra note 13, at 711.24 23 Fed. Prac. & Proc. Evid. 5362 (1 st ed.) citing JON R.WALTZ,THE NEW FEDERAL RULES OF EVIDENCE 38 2ded. (1975)25 InBrown v. Walter, 62 F.2d 798 (2d Cir. 1933), Judge Learned Hand claims, There can be no rational excuse[for admitting evidence of insurance on the issue of negligence], except the flimsy one that a man is more likely tobe careless if insured. That is at most the merest guess, much more than outweighed by the probability that the realissues will be obscured.Id. at 800.26Id.


7/43

7

would overthrow the requirement of fault as the foundation for negligence liability.27 Because

of the prejudicial and inflammatory effect28 allegedly inherent in evidence of insurance, the

foundation for liability would accordingly shift away from considerations of duty and toward a

knowledge that recovery will be paid by an insurance company.29 Much of this criticism,

however, is fallibly founded on the unrealistic belief that introducing insurance in the courtroom

will blow the jury away by opening to them a brand new and previously unseen world. But even

those30 who acknowledge that jurors may already be aware of the prevalence of liability

insurance and the high probability that parties are insured still fear that mentioning insurance

would invade

31

the jurys determination of liability, making it even harder for jurors to base

their decision on the real issues.32 Exaggerating the possibility that insurance would cause

jurors to lose focus of the real issues to instead decide verdicts on an extraneous ground such as

wealth33 or insurance ultimately leads some writers to fear that justice as administered by our

courts [would be] impotent and might result finally in the entire destruction of our present

judicial system.34 This fear extends to both generous juries that would award extravagant

verdicts35 because a defendant has insurance, and also to stingy juries that might go easy on an

27Kieman v. Van Schaik, 347 F.2d 775, 781 (3rd Cir. 1965)28Ogle v. Bassett Furniture Industries, Inc., C.A. NO. WD-81-16, 1981 WL 5867, at *3 (Ohio App. 6 Dist. Dec. 18,1981).29Ogle v. Bassett Furniture Industries, Inc., C.A. NO. WD-81-16, 1981 WL 5867, at *3 (Ohio App. 6 Dist. Dec. 18,

1981).30See e.g. Clint A. Corrie, Securities Arbitration and Insurance: When Worlds Collide, 1686 PLI/Corp. 439,(Practicing Law Inst. Aug. 6, 2008) (PLI Order No. 14310).31Id. at 45432Brown, 62 F.2d at 800.33 Maxwell V. Beghtol, The Present Rule as to Disclosure of Insurance in Personal Injury Cases, 15 Neb. L. Bull.328, 329 (1936-7).34 Maxwell V. Beghtol, The Present Rule as to Disclosure of Insurance in Personal Injury Cases, 15 Neb. L. Bull.328, 329 (1936-7).35Kiernan v. Van Schaik, 347 F.2d 775, 782 (3rd Cir. 1965).


8/43

8

insurance-less defendant.36 And so with the present judicial system at stake, Rule 411 continues

to exclude evidence of insurance.

At least earlier37 in the development of the rule, its supporters validated their argument

with empirical studies. In a study performed at the University of Chicago,38 for example,

researchers recorded a mock trial based on an actual personal injury trial and played the

recordings to experimental juries.39 Of the studys variables, researchers changed what the jury

heard with respect to the defendants liability insurance: the jury either heard testimony that the

defendant had no insurance; that the defendant did have insurance; or that the defendant had

insurance, after which the jury heard defense counsels objection and the courts instruction to

disregard the insurance evidence.40 The results indicated that if a jury heard that a defendant had

no insurance, ceteris peribis, the jury awarded the lowest amount of damages on average, while

the jurors that heard testimony of insurance and the subsequent fuss regarding such testimony

awarded, on average, the highest amount of damages.41 The researchers thus concluded that

juries tend to award less when they know that an individual defendant is not insured; and,

that where they know defendant is insured and a fuss is made over it the verdict will be higher

than when no such fuss is made.42

By these two policy reasonsrelevance and prejudicehas evidence of insurance been

barricaded from introduction into the courtroom on the issue of negligence or wrongdoing.

36 The fear that showing a defendant has no insurance would be prejudicial is similar to the fear that showing adefendant is impoverished would have the same effect. See e.g., Com. v. Bybel, 399 Pa.Super. 149, 164, 581 A.2d

1380, 1388 (Pa.Super. 1990).37 Studies like the University of Chicago study were conducted in the early- to mid-twentieth century and uncoveredempirical evidence supporting the hypothesis of prejudice. As later studies as those cited in Section VI of this notewould reveal, however, the earlier studies findings would not stand the test of time, as perhaps widespread

knowledge of the presence of insurance increased with time.38 Dale W. Broeder described this study in The University of Chicago Jury Project, 38 Neb. L. Rev. 744 (1959).39 Dale W. Broeder, The University of Chicago Jury Project, 38 Neb. L. Rev. 744 (1959).40Id.41Id.42Id.


9/43

9

Much of whether moral hazard considerations are able to conceptually hurdle these barricades

turns on what moral hazard even means.

III. MORAL HAZARD: MORE THAN A MERE GUESSTo Judge Hand, that an individual would change their behavior because of the presence

of insurance represented no more than only the merest guess.43 The question addressed in this

section is how this theory could be anything more than just thata mere guess about the

relevance of insurance. And if it does have the explanatory power this note contends it has, why

would an economics-savvy44 Judge Hand have failed even to mention an economically-based

theory about the effects of insurance?

A. Moral Hazard: What is it?Consider a typical penny-pinching person who leaves on a business trip during which the

company agrees to pay travel, lodging and food costs for the duration of this employees trip.

Lapping up the life of liberal spending, this otherwise thrifty traveler eats more and eats better,

and finds her way into more luxurious lodging. Because the company is compensating the

employee consumption, she has temporarily moved beyond the constraints of her own wallet and

adopted the more expansive budget of her employer. Unconstrained, the employee freely shifts

her behavior to reflect the liberty of life on the companys dime. This is moral hazard. Scholars

pin moral hazard to a more specific definition, calling it generally a phenomenon that lowers

costs45or otherwise releases an insured from cost constraints46 so that the insured

consequently changes her behavior by increasing the usage of [insured] services.47 In other

43Brown, 62 F.2d at 800.44 Judge Hand developed the economics-based landmark theory for negligence in U.S. v. Carroll Towing Co., 159F.2d 169 (2d Cir. 1947).45 Hyman Joseph, The Measurement of Moral Hazard, 39 J. Risk & Ins. 257, 257 (1972).46 Gary T. Schwartz, The Ethics and the Economics of Tort Liability Insurance,75 Cornell L. Rev. 313, 338 (1990).47 Joseph, supra note 45 at257.


10/43

10

words, by shifting behavior to more costly choices, the insured is spending money that would not

otherwise be spent. Consequently, other scholars have also identified moral hazard as the

intangible loss-producing propensities of the individual assured.48

In the example above, a company paying for its employees business-related expenses is

not a typical insured service, but it is not too hard to imagine a similar situation where

insurance results in similar shifts of behavior. The hypothetical driver in the introduction section

that avoided uncovered water damage to smash instead through a house might be an illustration.

In contrast, what many have found hard to believe is that an insured individual has the

propensity to produce losses without making conscious and calculated choices to recklessly

abandon all care. Insurance companiesjustifiably disfavoring these propensities because they

are those to whom the costs of the produced losses are shiftedhave similarly confused this

concept with an intentional change of behavior that amounts to malingering or even fraud.49

True, there are those obvious, but still rare cases in which conscious choice is the sole cause of

loss.50 But what critics and insurers seem to misunderstand alike is that moral hazard is not

necessarily a conscious choice to abandon all care, but rather is a response to incentives that

merely represents rational economic behavior.51 It is simply rational for any utility-

maximizing-but-cost-constrained individual to take advantage of the removal of costs that open

opportunities to increase consumption and thus utility.

The incentive to change behavior stems from the removal of cost constraints. Cost

constraints can keep people honestby having full responsibility and accountability in bearing

48 Mark V. Pauly, The Economics of Moral Hazard: Comment, 58 Am. Econ. Rev. 531, 535 (1968), citing O.D.DICKERSON,HEALTH INSURANCE 463, rev. ed. 1963 (emphasis added).49 Mark V. Pauly, The Economics of Moral Hazard: Comment, 58 Am. Econ. Rev. 531, 535 (1968).50Moral hazard also includes more deliberate acts, such as arson or suicide, that insureds sometimes engage inbecause they are insured. Jon D. Hanson & Kyle D. Logue, The First-Party Insurance Externality: An Economic

Justification for Enterprise Liability, 76 Cornell L. Rev. 129, 138, FN45 (1990).51 Pauly, supra note 49 at 535.


11/43

11

the total costs of their actions, individuals have incentives to ensure their actions will not give

rise to excessively costly consequences. But with the constraints removal, an individuals

incentives to avoid those costs also diminish. In the case of driving, for example, accidents,

break-ins, theft or other damage are incidents that impose costs on an uninsured motorist, who

would, as a result, at least hypothetically exercise greater caution when choosing how to drive,

where to park, etc. When that driver purchases insurance, however, the costs of those

incidentsoutside deductibles and premiumsare shifted to the insurer, and the insured

therefore has less incentive to exert the care it takes to avoid those cost-producing incidents (e.g.,

accidents).

52

The diminished incentive to exert care exists especially because exerting

preventive care is costly to the individual . . . while adding little to his welfare when losses due

to carelessness or bad luck are covered by the insurance contract.53 Such a rational response

could reveal itselfnot just in careful and accurate hedonic calculations to drive up an insurers

costs, but also in a complex of reflex actions, impulses, habits, customs, fashions and

hysteria,54 which indicates that moral hazard can be buried in the subconsciousnot the

calculated and consciousrealm.

Moral hazard as a subconscious reaction could possibly thus present itself much more

universally and in many more ways than legal scholars seem to have considered. Economists

have discussed possible moral hazard effects asserting influence in the frequently-observed

automobile insurance market,55 but also in areas such as health insurance,56 title insurance57 and

52Id.53 Campbell, supra note 2 at 100.54 Neuroeconomics, but see this, page X, where he argues that because driving is automatic, drivers would notrespond to the presence of insurance. He bases this argument, however, on an assumption that there is no moralhazard in insurance. In this assertion, that driving is automatic he also assumes that there is no decision -making indriving. Isnt it possible, if this incentive is imbedded in each individuals complex of reflex actions and

impulses that the autonomy of driving already includedmoral hazards effects?55See e.g., Jennifer L. Wang et. al.,An Empirical Analysis of the Effects of Increasing Deductibles on MoralHazard, J. Risk & Ins. (2008), http://findarticles.com/p/articles/mi_hb6645/is_3_75/ai_n31345110; Kuniyoshi


12/43

12

even crop insurance58 markets. And moral hazard does not just stop with insurance markets:

because moral hazard is a phenomenon that results when general cost restraints are shifted

away from an individual, economists find individuals reacting to these shifting costs in many

other circumstances where individuals are otherwise shielded from the costs of their actions.

Economists hypothesize that agents shielded from the supervisory glance of a principal may be

subject to moral hazard.59 One such principal-agent relationship60 susceptible to moral hazard is

found in the world of sports, where one economist hypothesized that even major league baseball

pitchers submit to a moral hazard influence.61 Another economist suggests that moral hazard

effects can be as subtle and commonplace as the choice to put a house key under the front door

mat, or the decision to burn leaves in a driveway adjacent to the house.62

B. Empirical Evidence of Moral HazardIdentifying hypothetical circumstances in which moral hazard operates is one thing;

actually finding empirical proof is a wholly separate yet crucially important consideration.

Inspired by the importance to insurance companies and policy-makers alike, economists have

sought to confirm the presence and scope of moral hazard with empirical analyses. Empirical

evidence, for example, confirmed that American League pitchers actually do respond to

Saito, Testing for Asymmetric Information in the Automobile Insurance Market Under Rate Regulation, 73 J. Risk &Ins. 335 (2006).56See e.g., Joseph, supra note 45.57See e.g.,Wendy Marianna Edelberg, Testing for Adverse Selection and Moral Hazard in Consumer Loan Markets,(FEDS Working Paper No. 2004-09), available at

http://www.federalreserve.gov/pubs/feds/2004/200409/200409pap.pdf.58See e.g., Keith H. Coble et al.,An Expected-Indemnity Approach to the Measurement of Moral Hazard in CropInsurance, 79 Am. J. Agric. Econ. 216 (1997).59 BERNARD SALANIE,THE ECONOMICS OF CONTRACTS: APRIMER, 107-109 (MIT Press 1997).60 John Charles Bradbury & Douglas Drinen,Identifying Moral Hazard: A Natural Experiment in Major LeagueBaseball, (July 2004), available athttp://ddrinen.sewanee.edu/Plunk/dhpaper.pdf, at 2 FN1.61Id. at 1. Bradbury and Drinen explain that pitchers in the major league baseballs American League face greaterincentives to hit batters because the costs of a retaliation possibility are shifted to a designated hitterthe individualthat replaces a pitcher in the batting lineup.62 Campbell, supra note 2 at 101.


13/43

13

decreased incentives associated with moral hazard to more frequently bean batters.63 Empirical

studies of the healthcare industry, moreover, have long confirmed that patients with insurance

consumed more health services64 because of a moral hazard effect.65 The automobile insurance

industry, with the most significant market with regards to litigation,66 has been the focus of many

empirical studies.67 Outcomes of the automobile insurance market studies have varied. One

study skeptically concluded that moral hazard was present only to a limited extent,68 while

another study, finding a significant69 correlation between insurance coverage and risk-taking,

conservatively concluded that a hypothesis of moral hazard in the automobile insurance market

cannot be rejected.

7071

Yet another study observed how drivers responded to deductibles that

would increase with the occurrence of accidents.72 Comparing drivers with policies that

increased deductibles after a claimType A driverswith those who enjoyed the same

deductible independent of the claims they madeType C driversthe study found that Type A

63 Bradbury & Drinen, supra note 60 at 1.64 Joseph, supra note 45 at257.65 Scholars have notably aimed studies at disentangling moral hazard from adverse selection effects. Both adverseselection and moral hazard would theoretically influence an insured individuals consumption choices, but theeffects would be at odds with each other. While moral hazard proposes that an individual would consume morebecause of insurance, adverse selection theory posits thatin the case of healthcare, for exampleit is theinherently unhealthy consumers that purchase more insurance and thus would already have the tendency to consumemore, instead of consuming more simply because of insurance. Separating the moral hazard effect from that ofadverse selection further strengthens the case for the presence of moral hazard. See Patrick Bajari et al.,MoralHazard, Adverse Selection and Health Expenditures: A Semiparametric Analysis(Natl Bureau of Econ. Research,Working Paper No. 12445, 2006) available athttp://www.nber.org/papers/w12445.pdf.66 Moral hazard effects in the automobile insurance market would be most significant to civil litigation becauseautomobile accident cases constitute the most frequent type of negligence case. Hanson & Logue, supra note 50

at 192, citing RICHARD A.POSNER,ECONOMIC ANALYSIS OF LAW 186-7 (3d ed. 1986).67 For a brief introduction to the myriad of empirical studies on the automobile insurance market, see Wang et. al.,supra note 55.68 Saito, supra note 55 at 335.69 Statistical significance indicates that a variable has some appreciable explanatory power in the dependent variable.70 Using regression analysis, it is said a hypothesis cannot be rejected when analysis reveals a significant enough ofa correlation between two variables such that the hypothesis could be true according to the regression model.71 Alma Cohen,Asymmetric Information and Learning: Evidence from the Automobile Insurance Market, 87 Rev.Econ. & Stat. 197, 198 (2005).72 Wang et. al., supra note 55.


14/43

14

drivers who had filed a claim were less likely to file another claim than were those of Type C. 73

From the changed claim-making behavior, the authors inferred the presence of an underlying

cause rooted in changes of driving behavior. They concluded that increasing deductibles reduced

the moral hazard effect, and thus [provided] a stronger incentive for drivers to drive more

carefully. 74 For Type A drivers, in other words, driving negligently was becoming more and

more expensive as the increased deductibles exposed them to a greater portion of the costs of

their driving behavior, and thus reinvented incentives for these drivers to drive more carefully to

avoid the costs of accidents.75

C.

Why Moral Hazard Has Not Been Considered

With documented evidence of moral hazard and the hypothesis that an insured individual

may even subconsciously react to decreased incentives to exercise care, one may ask why

scholars considering insurance as evidence have so hastily dismissed the theory as being

absurd.76 The fact is that few, if any, writers have taken a serious look at this phenomenon

when considering insurance evidence. Instead, critics of Rule 411 have focused more of their

attention on explaining away any alleged prejudicial effect that would result from the

introduction of insurance evidence.77

But if moral hazard theory asserts a position directly at odds with the underlying

rationales of Rule 411, why would critics of the rule not add this theory as yet another reason for

which Rule 411 did not make sense? Indeed, consideration of moral hazard seems to be

completely void from the insurance evidence literature. Perhaps one reason that can explain this

73Id.74Id.75Id.76 23 Fed. Prac. & Proc. Evid. 5362 (1 st ed.) citing Field & Murray, Maine Evidence, 1976, p.86.77 For a summary of main arguments lodged against Rule 411, see Relevancy and its Limits in the Proposed FederalRules of Evidence, 16 Wayne L. Rev. 167, 193 (1969).


15/43

15

dearth stems from the timing of moral hazards development. By the time moral hazard was

making its way into prominence in economics literature, there was already well-settled legal

precedent that disfavored evidence of insurance. Indeed, courts have documented their disdain

for insurance evidence since the early 1900s, while headlining economists did not start

developing moral hazard until the 1960s.78 Perhaps if moral hazard had experienced the

development it currently has, it would have received more attention as the legal rules developed.

But even after moral hazard was theoretically explored, validation from empirical studies still

lagged behind.79 Now, after economists have performed many empirical analyses of moral

hazard, still lagging behind is unanimity regarding the extent of moral hazard effects.

80

This

may explain why such a then-cutting-edge theory would not have been able to make its way into

the insurance evidence literature, and why courts would not likely have given much credence to a

little-explored and even less-proven hypothesis to overthrow time-honored precedent.

Regardless of the reason for which moral hazard has yet to claim stake in the discussion

on the admissibility of insurance, it is at least clear that the theory has now received the attention

and scrutiny that can allow it to form a credible basis for arguing that the exclusionary rule

should be reconsidered. While the development and exploration of moral hazard can enlighten

the view of the relevance of insurance evidence on the one hand, other social changes since the

crafting of the rulesuch as the growing prevalence of liability insurancemay change

78 Moral hazard did have its beginnings earlier in the twentieth century, being at least introduced as early as 1921.See FRANK H.KNIGHT,RISK,UNCERTAINTY AND PROFIT, 249, 251 (1921). However, it was not until the 1960s

when Nobel-prize winning Kenneth Arrow, among other influential economists, began to explore modernapplications and implications of moral hazard. See e.g., Kenneth J. Arrow, Uncertainty and the Welfare Economicsof Medical Care, 53 Am. Econ. Rev. 941 (1963); Mark V. Pauly, The Economics of Moral Hazard: Comment, 58Am. Econ. Rev. 531 (1968); Kenneth J. Arrow, The Economics of Moral Hazard: Further Comment, 58 Am. Econ.Rev. 537 (1968).79 Pierre-Andre Chiappori and Bernard Salanie provide several explanations for the empirical lag behind theorydevelopment, including, for example, the lack of adequate data sets. See Pierre-Andre Chiappori & Bernard Salanie,Testing for Asymmetric Information in Insurance Markets, 108 J. Pol. Econ. 56, 56-57 (2000).80 Jennifer Wang et al., briefly discuss the studies that have looked for asymmetric information and the varied resultsof those studies. See Wang et. al., supra note 55.


16/43

16

prejudicial implications on the other hand. This is so especially if moral hazard provides

additional probative value to evidence of insurance, because it thus becomes less likely that any

prejudicial effect will outweigh the probative value. Thus, reconsideration of Rule 411 would

reveal that the foundations of the prohibition of insurance evidenceirrelevance and prejudice

do not merit the same credence as they did when the rule was crafted. These rationales have

long since been far from well-settled foundations for the exclusionary rule anyway, so moral

hazard may be able to settle the score. Having provided a background for both the exclusionary

rule and the theory and evidence of moral hazard, the discussion will now turn to a more detailed

treatment ofhow moral hazard would affect Rule 411s foundational policies of relevance and

prejudice.

IV. THE RELEVANCE OF MORAL HAZARDA. Moral Hazard Passes Relevances Low Hurdle

It is not expected, nor is it reasonable to expect that moral hazard could be a game-

changing consideration for any jury debating negligence or wrongdoing. Especially considering

its subtle effects, moral hazard is not likely to make up a substantial part of an individuals

behavior equation. Therefore, the effects of moral hazard, considered in detail infra, may

admittedly be slight, and hesitance among the courts is therefore understandable. But according

to the rules of evidence, moral hazard should not have to have some substantial bearing on

materials issues before a jury may consider it.81

And even though this theory relies heavily on what some consider unsettled empirical

evidence, the fact that there have been credible, peer-reviewed empirical studies that document

the existence of moral hazard in automobile insurance and other markets should at least be

81FED.R.EVID. 401. The Federal Rules of Evidence make it clear that evidence having any tendency to make the

existence of a material fact more or less probable is relevant. Even if some tendency was slight, it would be such atendency under this rule nonetheless.


17/43

17

enough to dismiss assertions that moral hazard is merely a slight danger82 that leads to only a

tenuous83 connection between insurance and behavior. But even if the best that moral hazard

could muster was a mere tenuous relationship between insurance and liability, this in and of

itself would not be enough to defeat admissibility in court.84 This is true especially because the

Federal Rules of Evidence not only set the hurdle for relevance at a very low level, but also

because the rules tend to favor admission.85

In seeming disregard for the liberally admissive policy, disbelievers would quickly

dismiss the possibility that insurance could be relevant. They would prefer instead to invade the

province of what they must presume is an incompetent factfinder, and avoid wasting the time it

would take them to consider evidence they would unlikely be hoodwinked into believing

anyway.86 The fallible argument that what some may consider preposterous evidence has no

place being heard in a courtroom should not succeed because, no matter how absurd the evidence

may seem to the court, it is not within the purpose of the rules of admissibility to shield the jury

from evidence that thejudge,in her opinion, finds hard to believe. Indeed, it is the privilege of

the jury to believe the unbelievable if the jury so wishes. 87 After all, if courts were to make

findings on the basis of evidences believability, it would effectually eliminate the need of a jury

altogether. A proper approach would then be to leave the issue of believability to the jury:

82 Slough, supra note 13 at 710.83 FED.R.EVID. 411, advisory committee notes.84

Some courts have admitted evidence though, in the courts opinions, it may have been somewhat tenuous. Seee.g., U.S. v. Shaw, NMCCA 200600728, 2007 WL 1701709 at *6 (N.M.Ct.Crim.App., March 22, 2007); See alsoU.S. v. Harrow, 65 M.J. 190 (U.S. Armed Forces, 2007).85It is the general policy of the Federal Rules to favor the admission of relevant evidence, absent an extremelystrongshowing that admission will lead to unfair prejudice. Kehm v. Procter & Gamble Mfg. Co., 724 F.2d 613,627 (8th Cir. 1983) (emphasis added).86 Slough, supra note 13 at 710.87 The Supreme Court of Kentucky has held that evidence, regardless of the fact that the court found it preposterous,should be admissible because it is "the privilege of the jury to believe the unbelieveable if the jury sowishes."Mishler v. Com., 556 S.W.2d 676, 680 (Ky. 1977).


18/43

18

whether the factfinder believes certain evidenceeven tenuous88 evidenceto be true does

not bear on the admissibility of that evidence, but rather bears on the weight89 the factfinder

gives it in decision-making.90

B. Applying Moral HazardWith the standards of relevance in mind, consider again the driver mentioned at the

introduction of this discussion. According to this hypothetical situation, it was insurances

influence that dictated this drivers decision to drive into the homeowners property. Though

admittedly having some tendency to make the existence of that drivers wrongdoingthe

destruction of a homemore probable,

91

this evidence would likely be excluded under Rule 411.

There are yet other blatantly obvious instances in which insurance would be an important

consideration in determining liability but would nevertheless be ruled inadmissible. An insured

homeowner who intentionally torches her home,92 or an insured driver who erroneously believes

that he can drive more carelessly because he [carries] insurance for that93 provide clear

examples of individuals who consciously surrender to moral hazard and embrace the opportunity

to increase their own utility at the expense of insurance companies. Dismissing such self-

destruction as behavior that hardly seems rational, 94 writers have failed to grapple with the

88Even tenuous evidence should more properly go to the weight the [factfinder] gave a particular piece ofevidence, not to its admissibility or relevance. Shaw, 2007 WL 1701709, at *6; See also Harrow, 65 M.J. at 202.89The Supreme Court has given great deference to juries as factfinders: We are content to rely upon the goodsense and judgment of American juries, for evidence with some element of untrustworthiness is customary grist forthe jury mill. Juries are not so susceptible that they cannot measure intelligently the weight of identificationtestimony that has some questionable feature. Manson v. Brathwaite, 432 U.S. 98 (1977).90

The jurys province is deciding the case is not to determine whether what they heard was admissible, but whetherwhat they heard was believable: The jury need not believe testimony found to be admissible. People v. Thatcher,638 P.2d 760, FN4 (Colo., 1981).91 FED.R.EVID. 401.92Moral hazard also includes more deliberate acts, such as arson or suicide, that insureds sometimes engage inbecause they are insured. Hanson & Logue, supra note 50 at 138, FN45.93 InHerschensohn v. Weisman, 80 N.H. 557, 119 A. 705 (N.H. 1923), responding to the statement, You ought tobe a little more careful about [driving]. You may have an accident. You are liable to kill somebody, the defendant

quipped, Dont worry, I carry insurance for that. 94 Slough, supra note 13 at 711.


19/43

19

consequences of such illustrationsinstances that seem to glare in the face of Rule 411s

dismissal of any insurance as irrelevant. Admittedly so, however, this type of behavior may

indeed be rare, and is guarded against by other legal and insurance policy safeguards95 in order to

discourage these types of actions.

Therefore, these extreme examples may add but little fuel to the fire if moral hazard is to

have any chance at a reconsideration of Rule 411. But the individuals in these outstanding cases

hardly represent a significant portion of insured litigantsso what about the typical insured

individual in less clear-cut circumstances? And empirical evidence has shown how a typical

insured individual would be prone to some moral hazard effect, but can that lead to liability?

The following will answer these questions.

As mentioned, supra, moral hazard is defined as a loss-producing phenomenon.96 It

follows that with insurance comes a greater probability for loss. But whether those losses are of

the kind that give rise to a legal cause of action or liabilityi.e., whether those losses stem from

negligence or other wrongdoingdoes not follow from the definition of moral hazard alone.

After all, if the moral hazard of an insured individual produced losses, but did not give rise to

liability, introduction of the presence of insurance would still be irrelevant because no material

facti.e., negligencewould be rendered any more or less probable.97 Therefore, in order for

moral hazard to truly be relevant, it must be uncovered why moral hazard produces losses, and

whether that gives rise to liability as a matter of law so as to determine whether from the

existence of insurance a fact-finder could justifiably infer negligence.

95 As far as legal safeguards, there are separate causes of action for intentional acts as well as criminal prosecutionthat would deter insureds from intentionally cashing in on insurance policies. As far as insurance safeguards go, asa general matter, insurance policies cover only fortuitous losses. . . It is a basic principle that insurance policies donot cover intentional acts. LEONARD E.MURPHY, ET AL.,PROPERTY INSURANCE LITIGATORS HANDBOOK 332(2007).96 Pauly, supra note 48 at 535, citing O.D.DICKERSON,HEALTH INSURANCE 463, rev. ed. 1963.97 FED.R.EVID. 401.


20/43

20

C. Why Moral Hazard Produces LossThe question arises: Why? As already discussed here and by numerous scholars,

absent unique or rare circumstances, a driver is not likely to suddenly become adopt reckless

tendencies because of insurance. Then what is the changed behavior that gives rise to the

produced losses? Where does the propensity to produce losses originate? The answer is found

in the effects of moral hazard. Preventive care, while reducing the probability of various kinds

of losses, is a cost to an individualindividual utility diminishes when the expenditure of extra

resources must be diverted to exercising care (especially for societys sake) when that individual

would rather and more efficiently spend those resources for the production of other goods that

might more directly contribute to his own benefit or utility.98 As a simple example, the extra

time that one spends driving because she is unable to speed to more quickly reach her destination

could be used by that driver in another, more beneficial way like working to make money.

In light of the costs of taking precaution, it should thus be easy to understand why

insurance may result in a change of behavior. If taking care reduces the probability of lossthe

costs of which would otherwise have to be borne by the individual who caused the lossbut

insurance shifts the costs of that loss away from the actor, then insurance presents a diminished

incentive to invest in preventive care99the responsibility for reparations would no longer be

keeping the actor honest. As a result, an insured is less likely to engage in costly caretaking,100

which translates into more risky behavior the costs of which the insured does not have to bear.

Therefore, moral hazard in essence resembles having ones cake and eating it too: insurance

98 Campbell, supra note 2, at 100.99Id.100Id. If this is true, it should follow that shifting the costs of the insured service (e.g., accidents) back onto theinsured would re-increase their incentive to take care. Empirical evidence supports this assertion. Jennifer Wang etal. found that drivers do actually respond to incentivesat least in the form of increased premiums anddeductiblesto drive more carefully. Wang et al., supra note 55.


21/43

21

affords an opportunity to get the utility from the risk (or decrease in care) without paying the

entire101 costs for it. In short, then, the loss that moral hazard purportedly produces comes from

the reduction of activity that itself would otherwise reduce the probability of loss.

D. The Kinds of Losses Created and Whether Those Losses Give Rise to LiabilityBut what kinds oflosses does moral hazard create, and should it give rise to liability?

In an aggregate sense, moral hazard creates a general loss of societal welfare when the money

with which an insurer pays for the costs of a carelessness-created accident ultimately comes from

the pool of insured individuals.102 And when multiple insured individuals follow a similar

course of actionfailing to invest in preventive care because of reduced directly-borne cost

everyones premium increases, reflecting the substantial reduction in the communitys

wealth.103 But asserting liability against one who has caused a loss of societys welfare by

consuming more insurance hardly makes sensea plaintiff can hardly claim that the defendants

actions caused an indeterminate, nominal increase in the amount of insurance premium she pays

without being laughed out of the courtroom or sanctioned.

This type of aggregate loss, however, is essentially nothing more than a composite loss

comprised of the losses associated with increased accidents or injuries. If an insured neglects to

take preventive steps, it would follow that it would result in accidents or other costs that would

not otherwise occur. After all, the increased costs that the pool of policy-holders collectively

bears are coming from somewhere. The individualized losses inherent in these increased

101 Deductibles and premiums are costs that an insured would still have to pay for the benefit of having insurance,but even these costs are not prohibitive of moral hazard. Wang et al., supra note 55 (explaining that several otherstudies have found that deductibles may help control moral hazard, but not completely eliminate it).102 Campbell, supra note 2, at 100.103Id., at 100-01. Jon D. Hanson and Kyle D. Logue cite a simple example of how the costs of moral hazard can bespread across multiple parties by explaining that some people, when dining out with others who mutually agree, inadvance, to split the check, have an incentive to order more expensively than if paying for his own meal. However,if each party responds positively to this incentive, each party ends up bearing the cost of the collective over-orderinganyway. See Hanson & Logue, supra note 50 at 138, FN44.


22/43

22

accidents or injuries are possibly borne by either bystanders or the insured herself. Bystanders

may suffer a loss as the victim where an insureds diminished incentive to exercise care

translates into, for example, excessive speeds or a tendency to run red lights that causes accidents

with other vehicles. But these victims arguably do not actually bearthese losses to the extent

that these injuries are fully compensated through insurance or litigation. This is because the

insureds themselves actually bear the final losses. This could be in the form of the failure to

preventively secure ones insured property, resulting in a robbery, but ultimately, the final loss

would be borne by the insureds because it is they who must pay their own increased premiums

and deductibles to compensate either their own loss or that of a third-partys.

The fact that insuredsinstead of the victimsare paying for the losses caused by their

own rational, but still reprehensible responses to incentives should not overshadow the fact that

injuries are occurring with increased frequencycertainly something that could give rise to

liability. Moreover, if an insured has an insurance-rooted incentive to increase their own utility

by decreasing the amount of care they exercise, would a jury not be justified in inferring that the

fact of negligence or wrongdoing is more probable than without such an incentive?

The connection between the change of circumstances because of insurance and the

liability that could be attached to corresponding incentives can be made more apparent by

considering Judge Learned Hands theory of negligence. According to Judge Hands theory, an

individual has a duty to invest in precaution when the burden of doing so is less than the

expected cost of the accident,104 expressed by: B < P x L.105 Suppose that an accident and injury

to a certain individual can be avoided by the actions of another driver,D, ifD,for example, were

104 RICHARD A.POSNER,ECONOMIC ANALYSIS OF LAW 167 (Aspen Publishers 2003).105

In Judge Hands equation of negligence, B < P x L, B = the burden of caution, P = the probability of the loss andL = the magnitude of the loss.


23/43

23

to drive more slowly.106 Assume the probability of the accidents occurrence, P, is .001, and the

costs of the accident, L, would be $10,000, for an expected cost (P x L) of $10. Further assume

that driving the speed limit to avoid the accident requires an investment of $8. Although

efficiency would require the investment of $8 to avoid spending $10, without legal liability,D

will not do so.107 But because of the legal duty imposed when, as in this case, B < P x L,108D

will expend the $8 investment in precaution to avoid the legal damages of $10,000, or an

expected judgment cost of $10, for an individual savings of $2.109D is thus apparently better off

by investing in precaution, though it still requires an $8 investment.

WouldD shift behavior if she was subject to a moral hazard effect? Suppose now thatD

carries an insurance policy that insures losses of up to $50,000clearly exceeding the liability

he would otherwise facewith the payment of a $500 deductible. If P remains .001,D now

considers that she must only pay the cost of the deductible at $500 in the case of an accident, so

Ds expected cost of the accident is now a meager $0.50. While the costs of the accident remain

the same$10,000D only considers the cost that she herself must bear, and accordingly

chooses not to invest the now-more-expensive $8 precaution.110 In deciding liability, however,

courts assess reasonableness based on the total costs of the accidentnotonDs internalized

costsand, by definition of the economic theory of negligence,D has breached its duty of care

and would be liable for negligence.

It thus appears that the losses brought about by moral hazard not only originate in the

diminished incentive to take care, but this incentive may also ultimately give rise to liability. A

106 The numbers and figures are for illustration purposes only, and are adapted from an example Judge Posner usesin his textbook. Posner, supra note 103 at 167.107Id.108According to Judge Hand, liability depends on whether B is less than L multiplied by P. Carroll Towing, 159F.2d at 171.109 Posner, supra note 103 at 167-68.110For simplicitys sake, this illustration ignores legal expenses, legal error, mental and other miscellaneous coststhat may be associated with an automobile accident.


24/43

24

jury, therefore, would indeed be justified in inferring a higheralbeit slightprobability of

negligence from the existence of insurance, and would therefore be relevant on its face.111

E. Incentives as Relevant Evidence in Cases Other Than Those Involving InsuranceDrawing the inference of negligence from the existence of insurance, while possible, may

not be readily apparent to anyone who lacks understanding of moral hazard and its implications.

Indeed, such an inference went relatively unnoticed through the history of considering Rule 411.

Without considering moral hazard, therefore, courts and scholars blinded themselves with a

focus on the wealth and payment implications of the introduction of insurance evidence, and

have consequently failed to notice the part of insurance that actually has a relevant bearing on the

issue of liability: the underlying incentives. The role of moral hazard is then to draw out insured

individuals incentives as the relevantpart of insurance and thereby push aside the implied

money issues that, as will be explored in Section VI, may not have that much bearing anyway.

So if courts were to consider insurance within the moral hazard context, they would be able to at

least see the relevant, incentives part of evidence of insurance. More importantly, though, they

may also see how comparable this part of insurance is to the same parts of other cost-shifting,

incentive-creating mechanisms that, perhaps because of a lack of wealth implications, courts

have not excluded from courtroom consideration.

Consider, for example, an indemnity agreement. Indemnity agreements operate similar to

insurance contracts because, at its core, it shifts financial responsibility for some cost from the

indemnified individual to the one who indemnifies. However, there is no rule explicitly

prohibiting the introduction of evidence of indemnity agreements, and courts will consequently

111 FED.R.EVID. 401.


25/43

25

allow such for a variety of purposes.112 Also similar to insurance, an indemnity agreement may

create the risk for moral hazard, and, freed from liability for certain actions, indemnified parties

have incentives to be more aggressive in certain actions.113 With no exclusionary rule in its way,

however, evidence of an indemnity agreement offered to show such an incentive has already

overcome one of the biggest hurdles of admission. Indeed, courts openly considering the

incentive implications of an indemnity agreementwhich is what this note proposes for

insuranceis a situation that is not so far-fetched.

Haole v. State, for example, is one among several other courts114 that has considered and

based decisions at least partially on the incentives associated with indemnity agreements.

115

The

Haole court noted that a states indemnity agreement requiring permittees to indemnify the state

for losses could actually diminish general safety because the state would have less incentive to

avoid negligence.116 While the ultimate issue of liability inHaole may not have turned on the

incentives the indemnity agreement created for the state, the case nevertheless illustrates a

courts harmless consideration of the same incentives that, because of moral hazard, insurance

creates for insureds. Despite the harmless consideration of such evidence, the current controlling

evidentiary rule would likely forbid any court from so venturing. Are the insurance-created

incentives too much unlike117 those created by an indemnity agreement that courts refuse to see

112See e.g.,Brocklesby v. U.S., 767 F.2d 1288 (9th Cir. 1985) (introducing evidence of an indemnity agreement toshow a relationship among parties).113See e.g., Note,A Law and Economics Look at Contracts Against Public Policy, 119 Harv. L. Rev. 1445, 1463(2006).114

See e.g., State v. Korean Air Lines Co., Ltd., 776 P.2d 315 (Ak. 1989);Northwest Airlines, Inc. v. AlaskaAirlines, Inc., 351 F.2d 253 (9th Cir. 1965).115Haole v. State, 111 HawaiI 144, 140 P.3d 377 (Haw. 2006)116Id. at 158, 140 P.3d at 391.117 While the incentives underlying an indemnity agreement and an insurance contract may be similar, thisdiscussion does concede some notable contextual differences. In reference to a states indemnity agreement, forexample, the states inactions do not endanger the state in the same way that an insureds responses to her incentives

would endanger the insured. By responding an incentive to reduce care-taking, a driver, for example, may subjectthemselves to a greater risk of personal harm or death, whereas an indemnified organization may not face the samedeterrent effects from the possibility of endangerment. While this may be true, indemnified individuals or


26/43

26

how insurance could likewise eliminate incentive to avoid negligence and similarly result in

relaxed vigilance?118

Considering incentives in situations other than indemnity agreements can also provide

harmless perspective into motives and behavior. Where would be the harm, for example, if the

defendant-employer in a hypothetical wrongful termination suit offered evidence of the plaintiff-

employees incentive to under-invest time, energy or assets119 into his job that existed because

the employee was shielded from the employers direct supervision?120

So even though evidence of the same incentives that insurance creates for insureds may

very well be admissible under a different guise, Rule 411 yet maintains its suppressive effect

over evidence of insurance. Perhaps the old stigma attached to the word insurance thus still

remains, and such evidence remains a type of bte noire after all.121 Possibly hung up on such

an ancient rule, courts are consequently failing to consider the existence of a plausible link 122

between insurance and the type of incentives that other courts have not only considered but have

also found to be relevant.123 Courts have perhaps treated incentives coming from insurance

differently because insurance is also unique in its relationship to money and a partys ability to

organizations, if responding to incentives to relax vigilance, still face risks of harm that drivers may not face, like,for example, the risk of tarnishing ones name after consistently being associated with accidents and injuries.Regardless, it is unlikely that this difference is the cause of courts failures to look at insurance in the same way as

they have indemnity agreements. If this has had any influence on the disparate treatment, courts have at least yet toaddress such a concern, especially because they have failed to consider any incentives associated with insurance inthe first place.118Northwest Airlines, 351 F.2d at 257.119 D. Gordon Smith & Brayden G. King, Contracts as Organizations, 51 Ariz. L. Rev. 1, 12 (2009).120 According to contract theory, agents in a principal-agent relationship are also susceptible to moral hazard because

the agents behavior is not directly observable by the principal, and in the presence of multiple employees, theprincipal has no way of identifying the culprit. See e.g., Bajari et al., supra note 65.121 Though courts as Corbett, 375 F.2d at 265 have considered insurance evidence to be a bte noire of the past, itis possible that the stigma remains.122 The moral hazard effect as demonstrated in this discussion could provide the plausible link between the incentiveand the result for which courts have looked in order to admit evidence of the incentive. See e.g., Shea v. Esensten,622 N.W.2d 130, 132 (Minn.App., 2001).123 In Union Carbide v. Montell N.V., 28 F.Supp.2d 833 (S.D.N.Y. 1998), the court held that evidence of acompanys licensing practices was relevant to show that companys incentive to engage in the allegedly unlawful

conduct. The court also held that the probative value of such evidence outweighed any prejudicial effect. Id. at 843.


27/43

27

pay. Unlike evidence of a principal-agent relationship or an indemnity agreement, the

introduction of evidence of insurance allegedly carries with it a possible prejudicial effect

because of the simultaneous introduction of deeper pockets. And although this may be a viable

reason why insurance-created incentives would be treated differently, as this discussion will

unravel in Section VI, the alleged prejudicial effect from the introduction of insurance evidence

may, too, be a stale argument.

In sum, the long-asserted argument that evidence of insurance is irrelevant is not well-

founded simply because insuranceas a result of moral hazardgives rise to losses which may

give rise to liability. The Learned Hand theory of negligence confirms that an insured individual

has a diminished incentive to exercise care and is therefore more likely to make choices that are

considered in breach of a duty of care. Given the low standard of admissibility for relevant

evidence, however, and insurances similarity to evidence of incentives that courts have long

been admitting, this discussion has demonstrated a strong case for reconsidering at least the

relevance of insurance on the issue of negligence or wrongdoing. Evidence of insurance thus has

an arguably greater probative value than what has previously been considered. As a result,

whether the prejudicial effect of insuranceif there even is anyoutweighs this increased

probative value should also be reconsidered. But before this discussion turns to considerations

of the alleged prejudicial effect, this note first discusses competing inferences that may

determine the likelihood that any prejudicial effect outweighs the probative value of insurance.

V. CONSIDERING THE PROBATIVE VALUE OF THE MORAL HAZARDINFERENCE

While evidence of insurance and the incentives arising from the associated moral hazard

could assist a factfinder in its determination of a material fact (e.g., negligence),124 exactly how

124 FED.R.EVID. 401


28/43

28

probative moral hazards influence actually is on insureds behavior may be questionable. While

its similarity to issues that courts have already considered relevant should indicate at least some

degree of probative value, intuition may give rise to further doubt. Intuition might lead one to

question moral hazards implications if making one crucial comparison. That comparison is

between insured and uninsured individuals.

First of all, consider the implications of the foregoing with respect to uninsured

individuals: if an insured individual is subject to moral hazard and thus takes greater risk, an

uninsured individual, not subject to the same moral hazard, would presumably take less risk as

she must solely bear all costs associated with risk-taking. In fact, the lesson of moral hazard

itself indicates that less is more,125 or, a lesser amount of insurance would equate to more care-

taking in this context, and in general, greater efficiency and an increase in social wealth. It

should therefore follow that an individual with the leastamount insurance would exercise the

mostamount of care. Accordingly, in the same way that a plaintiff could introduce evidence of

the defendants insurance to show an incentive for greater risk-taking, an uninsured defendant

could likewise introduce evidence of the absence of insurance to demonstrate the incentive to

take greater care that she would have had whenever the lawsuit-causing incident occurred. In

fact, an uninsured defendant introducing an absence of evidence may be ofextreme

125 Tom Baker, On the Genealogy of Moral Hazard, 75 Tex. L. Rev. 237, 238 (1996), citing James K. Glassman,Drop Budget Fight, Shift to Welfare, ST.LOUIS POST-DISPATCH, Feb. 11, 1996, at B3.


29/43

29

importance 126 to them, because a jury may otherwise assume the presence of insurance if it was

not discussed in the trial.127

But assuming that the jury automatically awards more damages if no party mentions

insurance is not the only problem with this reasoning. Some of this proposition may also offend

the readers common sense: it seems counterintuitive128 that the individual who would lack the

foresight to protect against risk with insurance would actually be the more careful, responsible

individual, whereas the law-abiding, insurance-buying individual is labeled as the reckless one.

Indeed, experience denotes that the most responsible and trustworthy drivers are insured,

whereas the irresponsible are known to peregrinate without benefit of company protection.

129

If evidence of insurance is introduced against a presumably responsible insured individual, the

inference drawn from the insurance-created incentives to drive recklessly would therefore

compete with a possible inference of responsibility reached by virtue of the fact that the

individual is insured. The significance of this competition is that if the character inference

offsets enough of the moral hazard inference, the net probative value of the latter is more likely

to be outweighed by the danger of unfair prejudice or waste of time. The subsequent discussion,

however, demonstrates that asserting that the purchase of insurance is determinative or even

indicative of an insureds character for responsibility may not have the good reason that some

126 Leon Green,Blindfolding the Jury, 33 Tex. L. Rev. 157, 159 (1954). Green argued that an uninsured defendantsopportunity to introduce their lack of insurance was indeed of extreme importance because the jury would otherwise

assume she was insured and would be overly generous in their verdict award. While Green believed this was onemajor reason for which the rule against insurance should be reconsidered, this argument assumesand it will beshown that this assumption is erroneousthat insurance has an appreciable impact on jury decisions.127 The assumptions a jury makes about the presence of insurance is discussed, infra, in Section V(A). While thejury may assume the presence of insurance because it is so prevalent, it is doubtful whether that would affect theirdecision.128 Tom Baker, On the Genealogy of Moral Hazard, 75 Tex. L. Rev. 237, 238 (1996). Bakers article focuses on hisdisbelief of the less is more lesson of moral hazard and discusses not only the counterintution but also thecounterfactual bases for such a claim.129 Slough, supra note 13 at 710.


30/43

30

writers so hastily assume,130 and may therefore not be sufficiently apparent to a factfinder such

that it would create substantial competition with a moral hazard inference.

A. Irresponsibility is a Market-Specific CriticismThe foregoing discussion of moral hazard has demonstrated how insureds in many

markets and circumstances may be subject to a moral hazard effect. And though it may be

intuitive to posit that at least a motorist who ignores statutory requirements for insurance is less

responsible than their insured counterpart, this position may not hold with the same universality

as that of moral hazards effects. Is it equally intuitive, for example, that a farmer insuring her

crops would be more trustworthy and responsible than an uninsured colleague?

131

While the

empirically-supported moral hazard effects can explain why an insured farmer might take more

risks than her uninsured colleague,132 positing that the uninsured farmer is equally if not more

prone to take risks because of an irresponsible nature is tenuous at best. The level of

responsibility may be similarly independent of the presence of insurance when considering other

markets, like the healthcare market, where arguably the greatest determinant of the decision to

insure is affordability,133 not responsibility.

But automobile insurance may be different. Significant contextual differences in this

analysis are that a farmers responsibility to her crops is socially much less important than a

130See e.g., John B. Allyn,Automobile Insurance Coverage Issues, National Business Institute, 31636 NBI-CLE 1,34 (2006). John Allynblindly assumes with good reason that the uninsured driver is not as safe a driver as hisinsured neighbor, and fails to consider any causal factors for such an assumption. This is merely an assumptionthat he accepts without giving any mention to statistics or other empirical evidence which, if considered, would have

revealed a myriad other factors that may explain the reasons for which uninsured are uninsurednot just that theyare inherently irresponsible.131 John Horowitz and Erik Lichtenberg provide empirical evidence that, compared to an uninsured farmer, insuredfarmers respond to moral hazard and take greater risks with respect to chemical use on their crops. John K.Horowitz & Erik Lichtenberg,Insurance, Moral Hazard, and Chemical Use in Agriculture, 75 Am. J. of Ag. Econ.926, 935 (1999).132Id.133 Among several explanations for why affordability may be a better indication of the likelihood of purchasinginsurance, the nations current healthcare debate stands as irrefutable evidence that lower-income individuals indeedmay be less likely to have insurance.


31/43

31

motorists responsibility to other motorists, and a farmer may not necessarily be in violation of

law if she decides not to purchase insurance, as would an uninsured motorist. So not only could

driving without insurance still be considered irresponsible because it is in violation of most state

regulations,134 but also because a driver owes it to other drivers to provide compensation for a

wrong they could possibly commit while driving. The same could not be said of other insurance

markets. Therefore, if a certain type of insurance does not carry with it implications of such

import as statutory obedience and social responsibility, the question of competing inferences

cannot be legitimately raised. Instead, any inference regarding character should arise only in

circumstances in which insurance is not only to protect ones own self against the risk of loss,

but is also to protect others or serve some other social cause as yielding to lawas in automobile

insurancefor it is these factors that may have some implications on an insureds character. In

other words, the presence or absence of insurance may only be telling of ones character for care

(and thus, where the competing character inference is justified) in situations where the choice to

purchase insurance would also be influenced by some other factor that may also influence the

care that one takes (e.g., a sense of social responsibility,135 or a sense of the duty to obey

laws136). Situations such as a farmer choosing to purchase crop insurance because her farm is in

tornado alley, or a low-income individual forgoing insurance because it is not affordable do not

indicate anything about these individuals carefulness, and thus, would not justifiably give rise to

134As of 2000, 43 states and the District of Columbia follow some version of compulsory insurance, while the other

seven states have some sort of financial responsibility laws. Yu-Luen Ma & Joan T. Schmit, Factors Affecting theRelative Incidence of Uninsured Motorist Claims, 67 J. Risk & Ins. 281, 282 (2000).135 If an individual has a sense of social responsibility, it may follow that this individual, because of this sense ofsocial responsibility, would exercise care in order to violate social norms or to avoid invading others rights. While

this is an untested assertion, it is according to the authors common sense that this seems to follow. 136 If an individual is responsive to mandatory insurance-purchasing regulations, thereby manifesting some degree ofresponsiveness to law, it would follow that they might have a similar degree of responsiveness to regulations whendriving as well.


32/43

32

a competing character inference. The most prominent137 type of insurance market where there

are these implications is the automobile insurance market. Even here, though, the inference

about character may not be clearly drawn.

B. The Mystery of Uninsured MotoristsThough an inference about responsibility seems to intuitively flow from the question of a

motorists insurance status, lacks empirical evidence to support it. In fact, there is much

empirical evidence that opposes this position. Not only does empirical evidence of moral hazard

suggest that an insured motorist would take more risks, but other empirical evidence confirms

the existence of another pertinent effect called adverse selection.

138

This adverse selection

phenomenon posits that individuals will choose insurance coverage according to their own

perceived risk-taking tendencies they have while drivingin other words, the riskiest (and

perhaps least responsible) drivers would purchase a policy that offers the most coverage, while

the safest drivers purchase inexpensive policies that offer little coverage. From this follows the

possibility that an uninsured individual has actually made the decision to go forego insurance

because they perceive that it would be more costly to pay for insurance that would cover the cost

of a rare accident (because they are careful) than to individually bear the full costs of that

accident. Although hypothetically possible, the cited adverse selection studies consider only

insuredparties, and the context changes significantly when considering insured parties against

uninsured parties. This is so because there still may be an intuitive, competing inference about

characterthat even if a driver perceives that they are a careful driver (never mind the truism

that most people think they are above-average drivers), they would not completely forego

137Automobile insurance represents nearly 50 percent of property/liability insurance premium volume in the UnitedStates and similarly large percentages throughout the globe. Id.138 Cohen, supra note 71 at 197. Cohen finds evidence of adverse selection in the automobile insurance market,where low-deductible choices are correlated with more accidents and higher losses.


33/43

33

insurance because it would be against the law, and possibly socially irresponsible. These most

careful and responsible drivers may instead still adversely select some coverage, but with the

least amount possible. This evidence, though, at least pushes against any suggestion that social

responsibility correlates with the amount of insurance one purchasesthat one who buys more

insurance is more responsible and trustworthy than one who buys less. The question still turns

on implications of individuals who purchase no insurance altogether.

But even those who would suggest that uninsured motorists are less responsible behind

the wheel would struggle to find empirical evidence that can support their position. To begin

with, uninsured motorists in any context have received little attention in the literature.

139

And

when writers have observed this group, they have found other significant variables that correlate

with the rise of uninsured motorists. Yu-Luen Ma and Joan Schmit performed an analysis, for

example, that yielded results indicating that the prevalence of uninsured motorists increased as a

states insurance regulatory scheme became less strict,140 suggesting perhaps that those who

would be uninsured have at least some sense of responsibility when it comes to obeying the law.

This also indicates that if otherwise uninsured motorists respond to stricter regulations for

acquiring insurance, they may also have some degree of responsiveness with respect to road and

traffic regulations, making it more difficult draw an inference of a risk-taking character.

With regard to reasons for which an individual might choose not to buy car insurance,

perhaps a more compelling reason than a lack of social responsibility is the individuals

subjection to poverty. Ma and Schmits study corroborated previous studies141 when finding

empirical evidence that demonstrated that the number of uninsured motorists increased with the

139See Ma & Schmit, supra note 133 at282-83 for a review of the literature relating to uninsured motorists.140 Ma & Schmit, supra note 133 at 288-93.141 Ma and Schmit review previous studies that consider the effect of insurance prices on the decision to purchaseinsurance. Id. at 283.


34/43

34

percent of people in the area living below the poverty level.142 Other insurance professionals

agree that it is simply a reality that, given choices and a limited amount of money, most

people will choose to pay their rent first, feed their kids second while insurance descends to a

distant choice.143 Results from other markets confirm the same preference of impoverished

individuals.144 But even if the affordability of insurance thus appears to be a significant factor

that could contribute to the decision to buy insurance, this does not mean that an inference about

character for care is ruled out. Indeed, the lack of empirical evidence confirming a lack of social

responsibility in uninsured motorists does not rule out the possibility that such a correlation

exists.

145

The existing empirical studies, though, at least fail to provide any reasonable basis on

which proponents would found an argument that uninsured motorists are inherently less

responsible. Such an inference from the existing evidence would not only be tenuous, but must

imply that an individual who chooses to pay rent and feed her family before paying the insurance

bills has an innate propensity to drive more recklessly. Such is simply not rational.

C. Need for Further InvestigationThe point of this diversion has been to consider the possibility that any probative value

from inferences about character from the presence or absence of insurance would reverse the

probative value of moral hazards effects such that prejudice or waste of time considerations

would outweigh any remaining probative value. The foregoing has demonstrated that the

142Id. at 288-93 (2000).143 This statement is made by Texas Insurance Commissioner Jose Montemayor, and is cited in: Stephanie K. Jones,

Uninsured Drivers Travel Under the Radar, INSURANCE JOURNAL, August 18, 2003, available athttp://www.insurancejournal.com/magazines/west/2003/08/18/coverstory/31590.htm.144See e.g., Helen Levy & Thomas DeLeire, What Do People Buy When They Dont Buy Health Insurance andWhat Does that Say about Why They Are Uninsured?, 45 Inquiry 365 (2008). In this study, Levy and DeLeire usedata from the Consumer Expenditure Survey to find that prices, preferences and income help explain why somehouseholds do not buy health insurance.145 The lack of empirical evidence could be for a number of reasons. It could be, for example, that quantifyingcarefulness when driving is difficult in terms of the type of inference that might be associated with insurance. Therecould also be an endogeneity issue with some variable such as poverty. This possibility is mentioned briefly, infranote 145.


35/43

35

character inference is limited in scope, and may only be one among many other empirically

tested factors that explain an uninsureds behavior. Though studies have not explicitly

considered an inherent tendency for irresponsibility as a causal factor for remaining uninsured,

there is a possibility that such a characteristic is independently significant or otherwise

endogenous146 with respect to factors already considered. There is thus a need for further

empirical exploration before the character inference drawn from insured status could be

conclusively ruled out as having explanatory power that would compete with moral hazard

effects. Until then, this character inference seems too tenuous and unproven to say that it could

overtake a significant amount of probative value from the moral hazard inference. If the

inference is so tenuous, moreover, the factfinder would also be less likely to independently draw

such an inference. Even ifthe factfinder could infer an individuals character for care from their

insurance status, how much of that inference could possibly be drawn from the partys demeanor

and appearanc

livingston - hazard in the courtroom

Documents